Avoiding 'Green' Investment Scams

by: Toby Shute

FINRA, the big regulator of U.S. securities firms, has recently addressed a new threat to your financial well-being, and it's one that I expect to become more prevalent in 2010: the green energy investment scam.

This is a twist on the traditional energy (i.e. oil and gas) scam. The "hook" is an undeniably compelling macrotheme: the rise of solar, wind, and other alternative or renewable energy sources. The promoter convinces you that some tiny stock has a game-changing technology, a huge untapped market, or a big government contract about to fall in its lap. The idea is to get enough people excited about the stock that they'll pile in and push up the price of the thinly traded issue. This gives the perpetrators of the fraud enough liquidity to exit their position at a big profit. Hence the term "pump and dump."

FINRA provides great tips about what to look for to spot such a scam, including:

  • Unsolicited communications (from snail mail to tweets, fraudsters have all media covered).
  • Predictions of swift and exponential growth (a surefire 367% gain in the next two weeks!).
  • No actual product on the market (but the prototype's almost ready to go).

To avoid getting duped, FINRA recommends looking at where a stock trades (i.e. a national exchange like NYSE, Nasdaq, or AMEX versus an over-the-counter market) and reading a company's financial filings. Another scam-sleuthing tool I would add to the list is Motley Fool CAPS.

On CAPS, we make calls on whether stocks will outperform or underperform the broader market. CAPS players have identified big winners like Tata Motors (NYSE:TTM), Bruker (NASDAQ:BRKR), and Wonder Auto Technology (OTCPK:WATG) over the past year. They've also proven adept at sniffing out scams.

Some skeptics worth following include UltraLong, TSIF, and Tastylunch. A new account, TMFStockSpam, has been set up exclusively to track the performance of stock spam received by Fools. Yours truly, also known as TMFSmashy, has also been known to expose a whopper or two. (Anyone remember Pax Clean Energy?)

Other green energy names that I've given the big thumbs-down include PetroAlgae (PALG.OB), which, despite its new partnership with Foster Wheeler (FWLT), can't possibly warrant a market capitalization of $2.4 billion, and JBI Inc., which is promoting a waste plastic-to-oil process that "produces oil at less than $10 per barrel." Now why didn't Chevron (NYSE:CVX) think of that?

As the government showers money on alternative energy projects, some half-baked schemes will suddenly seem plausible, even profitable. It's important to keep your wits about you.

Disclosure: Author doesn't have a position in any company mentioned.